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Good day, and welcome to the CBI

Good morning, everyone, and thank you for joining us for the CBI

Thank you, Lori. Good morning, and thank you for joining us for today's call. We are pleased to share our second quarter performance and to discuss our outlook for the remainder of the year. As I outlined on our last earnings call, we started 2023 with an exceptionally strong first quarter, which provided important momentum for the full year. Overall, our business performed as expected for the second quarter with the exception of two areas: first, within our Government Health Care consulting business, we experienced some unanticipated contract delays, including one significant project that is now expected to begin early next year. Within that business, we expect the other significant project delays to be short-lived and for work on many of those projects to commence later this year. Second, our traditional accounting and tax business was impacted by changes to tax filing time lines in California. This work still needs to be completed and has been pushed into Q3 and Q4 of this year. The delay in work in those two businesses had a disproportionate impact on our earnings based on the cost of having trained, experienced professionals available for that work, who were largely underutilized through the first six months of the year. With those two exceptions, our business continued to perform well in the second quarter, and demand for our services remained strong. Now, turning to the performance of our two primary practice groups starting with our Financial Services division, where we experienced total revenue growth of 12.2% and organic revenue growth of 3.9% for the second quarter. As expected, demand for our core accounting and tax services remained strong. We were also pleased to see continued strong demand for our advisory services, where the work tends to be more discretionary and project based. As I mentioned, we experienced some contract delays in the second quarter within our Government Health Care consulting business. As a reminder, our clients for this business are primarily state governments and the states dictate the time line for the services that we provide. We've been in the Government Health Care consulting space for over two decades and we've experienced similar contract delays from time to time in the past. This business has always been able to recover and has demonstrated steady growth over time. To that end, the new business pipeline remains strong, and we continue to see new opportunities for growth. Within our Benefits and Insurance division, we experienced organic revenue growth of 4.5% for the second quarter with contribution to that growth coming from every major service line across the division. For our Employee Benefits business, we saw a strong production and increased service revenue with client retention well above 90%. Like Employee Benefits, our Property & Casualty Insurance service line continues to experience high client retention rates, coupled with strong trend to fuel growth. Our Retirement and Investment Services business saw an increase in project work within our actuarial team, which contributed to our results for the second quarter. Our Payroll business also had a good quarter with strong production, an increase in retention and new clients with our up-market payroll platform and traction with fee increases among the factors driving growth. We plan to continue to add producers during the second half of the year, and recruitment efforts are underway now as we harvest our candidate pipeline. Based on our performance for the first half of the year, I'm pleased to raise revenue guidance to improve 10% to 12% for the full year and to affirm adjusted fully diluted earnings per share guidance for the full year to improve 11% to 13% over 2022 results. With this, I will turn it over to Ware Grove, our Chief Financial Officer, to provide additional information on our financial performance for the second quarter and for the first half of the year. Ware?

Thank you, Jerry, and good morning, everyone. Let me take a few minutes to talk about the key highlights of the second quarter and year-to-date numbers we released this morning. Total revenue in the second quarter increased by $36.6 million, up 10.1% over second quarter a year ago. Same-unit revenue was up $15.0 million, or up by 4.1%, with acquisitions contributing another $21.6 million or 6% to growth compared with last year. After an extraordinarily strong first quarter, as Jerry commented, with two exceptions that I will detail in a moment, the core business performed well in the second quarter and in the first half of this year. We previously commented on higher interest rate expense headwinds this year and headwinds related to the increase in our tax rate compared with prior year. In the first half, reported increase in adjusted earnings per share was up 11% compared with last year. I think it is important to know that this rate of year-over-year growth in earnings includes a $0.04 per share impact of higher tax rates and includes a $0.09 per share impact from higher interest expense headwinds for the first half. As Jerry commented, two items disproportionately impacted second quarter results. This creates optics that may naturally raise concerns. So let me jump in and provide some additional detail behind what happened and the actions we are taking. Many of you generally may be aware that the IRS granted a six-month tax filing extension this year that applies broadly -- to broadly defined areas within the state of California due to flooding and severe weather conditions that occurred earlier in the year. Our core Financial Services annual revenue in California is about $120 million, and we expected that this delay in tax work could impact second quarter and first half results. We estimate the first half impact at approximately $0.04 per share, with most of this impact occurring in the second quarter as we carried staff through this period without the revenue. This work will be done in the second half of this year. And of course, this impacts the normal seasonality of first half versus second half results that is typical within our core Financial Services Group. The second item that impacted revenue and results in our Government Health Care consulting business, which is approximately $185 million in annual revenue. The impact was a result of delays in project work that primarily impacted second quarter results. With hundreds of active engagements underway at any time, this business has been a steady performer in achieving revenue and earnings growth over many years. From time to time, for reasons beyond our control, project work gets delayed. Sometimes this can be a result of delays in the regulated contract renewal RFP process from state agencies due to administrative delays where at times, our state agency staff is not ready with the information or the data necessary for us to perform the work as scheduled. In the second quarter, we learned of a significant contract where the normal renewal cycle was expected to occur midyear. However, administrative delays are now pushing this renewal into 2024. This business typically sees a steady pipeline of new or renewing project work with a very high percentage of project proposals awarded to CBI

Thank you, Ware. I'd like to provide a brief update on our M&A results for the second quarter and for the first half of the year. During the second quarter, we completed another strategic acquisition to be included within our Financial Services Advisory business and a small specialty tuck-in acquisition to be included within our accounting and tax business. Among them is Pivot Point Security, a cyber and information security firm based in New Jersey. We've been searching for an acquisition in this area for a long time. We are pleased to have found a cybersecurity firm that will enhance our advisory service offerings and bring added expertise in this area to our CBI

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good morning, and thanks for taking my questions. I appreciate all the color on the two delays in the quarter where -- just one quick follow-up there. On the Government Health Care consulting side, it sounds like the majority of that is expected in the back half. But I think you did call out a bigger project that's leading into 2024. Is there any way to size the impact of that delay specifically?

No, we haven't sized that. It's not insignificant. So Andrew, that's why we commented that we need to align the cost structure with the expected second half revenue, and we're doing that immediately as we speak.

Understood. And then maybe a bigger picture question on the cyber opportunity. I know you guys have been talking about being interested in that space for some time. Can you just kind of refresh us on that opportunity, how Pivot Point fits into that strategy? And whether or not this is kind of a one-and-done acquisition there or if there could be bigger chunkier deals that you'd like to do here, because it seems like an area that's in quite a bit of demand?

Andrew, this is Jerry. Yes. Precisely, as you indicated, this is a space where we've had high client demand. We have some capabilities in this area, but the demand has historically outstripped our capacity. We've looked for a long time for the right firm. There are a lot of firms out there that report to be expert in this space that didn't hit our quality standards. So we are thrilled to be able to bring on Pivot Point. When you ask about future plans, we will continue to look for opportunities to expand in this space if and when we find other firms of the same quality. What they do? They will fit in with our -- within our advisory practice on the Financial Services side, work very closely with our -- specifically with our risk and advisory services. They assess vulnerability that consult around that vulnerability and they make recommendations as to how to mitigate it. So, spot on with regard to what we're hearing from our clients and what their needs are.

Understood. And if you wouldn't mind me squeezing in one last one, which is kind of a consistent question each quarter, which is just kind of on the M&A front. It sounds like the pipeline is still active, and there's a decent amount of capacity. Any notable change in terms of the pricing in that end market as we continue to see quite a bit of activity from your competitors there?

Yeah, Andrew, we have not seen really any material change in the pricing, although what we're hearing in different industries is that pricing is softening a little because of the interest rates and just the impact on the financial buyers that being private equity. We've not really seen it to date in the assets that we're looking for, or looking at, but we're keeping an eye on that. But, listen, for premium opportunities, premium firms, I don't think there's any pricing bargains out there. We don't look for those for bargains. We really look for quality firms. They are going to be great cultural fits. But on the encouraging note, at least pricing seems to have stabilized, at least for the time being.

Great. Thank you.

Our next question comes from Chris Moore with CJS Securities. Please go ahead.

Hey good morning guys. Thanks for taking a couple. So, obviously, you talked quite a bit about the government health care project revenue. Maybe just beyond that, how would you characterize the momentum within the project revenue outside of the government health care space?

Yeah, Chris, this is Jerry. It remains very strong, and we're very encouraged by it. In a less certain economic environment, the portion of our business that tends to be a little bit more difficult to predict is around our project-based advisory services. What we've experienced through the first six months is demand for those services still remains very healthy. There is -- it's a little bit of a different mix, particularly on the private equity side, private equity advisory side, fewer really large projects, but largely offset by a larger number of smaller projects. So I remain very encouraged by what we're seeing there and remain optimistic about the second half of the year. Ware, do you want to?

Yeah, Chris, I can just add a couple of things. Clearly, the government health care and to some degree, the deferrals and the tax return work in California impacted second quarter first half results. If you look at our same-unit revenue, which I think addresses your question, how is the rest of the business doing, while we reported in second quarter of 4.1% same-unit growth, adjusted to eliminate those items, it would be 6.2%. And for year-to-date, we reported 7.2% organic growth. And eliminating those items, it would have been 9%. To us and hopefully to you, that's a very strong indication that the balance of the business is very healthy.

Got it. Very helpful. Pricing certainly have been more dynamic in 2022. Can you talk maybe a little bit more about the pricing in the first six or seven months of 2023? Is it more normal, the 2% to 3% price increase earlier in the year and that's it, or just help me understand how the pricing is working in these days?

Yeah. Great question, Chris. Just again, eliminating the impact of government health care and financial services, where pricing is more dynamic, the first half organic growth was reported at 7.4%. It would have been 10.1% without government health care consulting. Now that's about still 70%, 80% driven by pricing, so we're continuing to get pricing and absent a couple of things we talked about, we're optimistic about margins despite the headwinds we're facing that are unique to 2023.

Got it. Very helpful. I leave it there. Appreciate it guys.

Our next question comes from Marc Riddick with Sidoti. Please go ahead.

Hi, good morning everyone.

Good morning Marc.

Hi, Marc.

So I wanted to touch a little bit -- and I thank you for all the color and detail that you provided on everything. So I did want to go a little bit more big picture here. And I'm wondering if you could spend some time talking a little bit about some of the trends that you may be seeing from your customers, whether a particular industry verticals that might be a call out, or particular green shoots that we might be seeing in the economy that have evolved during the course of the year?

Yeah. Marc, consistent with the headlines that everybody is reading, the small-middle market businesses continue to actually perform quite well in this environment, and continue to be quite optimistic about the rest of the year and beyond that, I would predict. We survey -- as you know, we survey our offices and our practice groups quarterly in anticipation of this call, and that's really what we're hearing. There are a couple of notes, of course, of caution, rising interest rates, access to credit, et cetera. But not to the level of concern where they think it's going to have a material impact on their business.

Okay, great. And then I was wondering if we could touch a little bit about a comfort level around leverage. I guess, with the acquisitions, we're about -- with the slide deck looking at about two times, can you remind folks kind of your large-scale views as far as leverage levels and comfort levels and then what you might be thinking about going forward then?

Yes. Leverage is -- this is Ware. Thanks, Marc, for the question. Leverage is at about 2x adjusted EBITDA, and we have about $178 million of unused capacity against the $600 million facility. Just remember the seasonality of cash flow, we've spent $85 million in the first half on acquisitions, plus another $48 million in the first half on share buybacks. Seasonally, we don't really generate a lot of positive cash flow in the first half. So the positive cash flow comes in the second half as the seasonal work done in the first half converts to cash. So we think we've got plenty of capacity, and we remain very actively engaged in potential acquisitions, and we've got the flexibility to do share repurchases.

Okay. Great. And then the last one for me. I was wondering if you could sort of give us a bit of an update as to your investment expectations around maybe head count or technology spend and the like, outside of the moving into the offices and the like. Can you just sort of give maybe an update as to what your plans are maybe for the remainder of the year on that type of investment?

Yes. I would say, Marc, nothing beyond what you've traditionally seen there. I mean we are always in the market looking for best-in-class talent, right? So we continue to have an active recruiting effort always going on. With that said, in certain areas where the business is softer, obviously, we'll pull back on that hiring. As far as technology is concerned, we've made substantial investments in that area. We continue to make substantial investments. There's a lot of developments that are happening in our industries, and we feel like we're at the right level of spend, which is really consistent with what you've seen over the past couple of years. Ware?

Yes. I think the investments in people incrementally has been coming and will continue to come on the new business development front, both on the Financial Services, but particularly focused on Benefits and Insurance. So we'll continue that. And to some degree, that presents a little bit of a margin headwind on top of the things we already talked about. But I know you and others have seen the headlines of the risks and the other things announced with the Big 4. And our take on that and the information they've shared with us is that I believe they probably over-hired last year. We've stayed pretty carefully aligned and we're not really misaligned other than a few corrective actions we need to take, particularly focused on Government Health Care. So I think we're good to go, and we're not really misaligned on a talent and head count basis.

Thanks a lot. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Grisko for any closing remarks.

Okay. Thank you. Before I go to my traditional closing remarks, I just want to -- because of the way this quarter played out, I just want to caution against predicting quarterly results for us really for 2 reasons. The nature of our business, and you saw it in the second quarter is that work can't get accelerated as it was in the first quarter or it can't get delayed as you saw in the second quarter. When it's delayed, of course, we have the labor costs that are there ready to do that work. And so the impact on earnings is exaggerated or exacerbated. The second factor is that as we've been very successful, fortunately, in bringing out some terrific firms, but to the extent that there are 4 accounting firms that creates even more seasonality. So you'll see higher revenue, higher earnings in the first half of the year, but maybe a little bit less. And then even quarter-to-quarter in the third quarter or fourth quarter, that work is a little bit more difficult to predict. All of which is why we don't predict quarters. With all of that said, the business remains very strong. As were indicated, from an OGIR perspective, we would have had substantially higher OGIR, if you just exclude those 2 items and we are, in fact, based on our results through the first half, very pleased to be able to raise our revenue guidance for the rest of the year and to hold our EPS guidance. Beyond that, so beyond 2023, still committed to our 8% to 10% top line growth and 16% to 20% kind of double that on the EPS growth. So very pleased with the business the way it performs and very pleased the way it has performed through the first 6 of the months. With all of that, as we wrap up, I want to thank our shareholders and analysts as we always do for your understanding and your support of the business. And most importantly, I want to thank our team for the very solid first year -- or first half year results, for your focus on providing exceptional service to our clients and equally important for your support of our team and each other. Thank you very much, and we look forward to talking at the end of the third quarter.